SHRI NARINDERPAL GUPTA,MUMBAI vs. DCIT CEN CIR 3(3) , MUMBAI

The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of expenses relatable to exempt income by the AO by invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. For this assessee has raised the following ground No. 1: -

Briefly stated facts are that during the year under consideration the assessee earned dividend income of ₹ 52,37,055/- and claimed the same as exempt under section 10(34) of the Act. The assessee has made suo moto disallowance of expenses relatable to exempt income at ₹ 2,72,621/-. The AO during the course of assessment proceedings noted that the assessee has not maintained separate accounts for exempt income yielding investments and for business activities and even the assessee has not proved one to one nexus between the expenses of business and expenses of exempt income yielding investment. Accordingly, the AO disallowed the administrative expenses under Rule 8D(2)(iii) being 0.5% of average value of total investment at ₹ 24,16,038/- . The AO after considering the suo moto disallowance of ₹ 2,72,621/-, added the balance sum of ₹ 21,54,186/- to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) confirmed the action of the AO by stating that for receiving 3 dividend, the assessee have to incurred administrative expenses. Aggrieved, assessee came in second appeal before Tribunal.

Before us, the learned Counsel for the assessee argued that the assessee has already made a disallowance on reasonable basis by suo moto disallowing 5% of the dividend income earned during the year. It was claimed that investments held by the assessee are long term investments for which on time decision is taken by assessee and once the investment is made, thereafter no expenses are required to be incurred. The learned Counsel for the assessee drew our attention to the assessee’s paper book at page 190, wherein the administrative expenses incurred are to the tune of ₹ 27,97,411/- apart from demat charges of ₹ 10,768/-. The learned Counsel stated that from the very nature of expenses that it cannot be attributed that these expenses are for the purpose of earning of exempt income rather all these expenses are for the normal business of the assessee. The learned Counsel for the assessee stated that neither the AO nor CIT(A) has recorded any satisfaction as regards to making of disallowance by invoking the provisions of section 14A read with section 8D of the Rules. According to assessee for invoking the provisions of section 14A read with Rule 8D, the AO should be satisfied after examining the accounts of the assessee that there is expenditure relatable to exempt income. Once there is no satisfaction recorded by the AO in term of the provisions of section 14A of the Act read with Rule 8D of the Rules no disallowance can be made. On the other hand, the learned Sr. Departmental Representative relied on the orders of the lower authorities.